Creating a Budget for 2023? Consider These Tips

It's that time of the year: budget season!

When developing a budget for your business, there are a lot of factors to consider, such as revenues, expenses, build-out costs, industry- and inflation-related trends, and much more. 

© Courtesy of Granger

Here, Naomi Granger, founder of the National Association of Cannabis Accounting and Tax Professionals, shares critical factors cannabis businesses should consider when building their budget for 2023 and how they can plan for the potential impacts of even greater inflation in the new year.

REVENUES

When creating a budget, Granger says one of the first factors owners need to consider is their revenues.

Retailers: Retailers should track existing data to access revenue numbers. 

"They should be looking in their POS (point of sale) system,” Granger says. “They should be able to see how many transactions they're doing on a weekly basis and what their average basket price is per transaction. If you multiply the total transactions times the average ticket price or average basket price per transaction, you can get how much you should expect to earn on a weekly, monthly, or annual basis."

Cultivators: Granger says cultivators need to determine how much their yield is in pounds after harvest and how many times they will be able to produce that in a year. 

"Once they figured out how much they're able to yield and how many times they can do that in a year, now they have to look at the market and figure out the price per pound they're able to get," Granger says. "They should be keeping track of that and knowing what price per pound they're getting. And if they're new, they can ask other cultivators in that market."

Cultivators should also factor in inflation-related costs.

"What we're experiencing right now is price compression. So, for the price per pound, we're seeing significant declines this year and as markets mature," she says. "At the very beginning, it's like everything flies off the shelves. Whoever's the first cultivator, all their product is going to sell. ... But as the market matures and there's more cultivators in the market and there's more choices for retail dispensaries, then price compression happens, and you've got to start marketing and thinking about other things."

With all these factors included, Granger says cultivators can ultimately determine their revenue numbers by figuring out how much they can yield and how much they can sell it for.

COST OF GOODS SOLD

Granger says operators need to evaluate the cost of goods sold (COGS).

Retailers: Retailers must determine how much it costs for them to buy the product from the cultivator, which depends on the wholesale price per pound in that market, she says. "A lot of times … maybe 50% to 60% of your revenue is probably going to be your cost of that product."

Cultivators: Cultivators need to determine how much it costs to grow that product, which includes electricity, utilities, rent, payroll, and more, she says.

This COGS calculation is also vital for allowabletax adjustments under IRS Code 280E.

PAYROLL

Cultivators and retailers need to consider how many employees they need to staff, and the costs associated with it.

For example, retailers will need to determine their hours of operation and how many full-time staff members they'll need to fulfill those hours. They'll also need to hire employees based on the location size, so they can adequately service the volume of customers, Granger says.

Operators must also consider employer taxes and regulatory requirements such as minimum wage, employee rights, and full-time equivalents.

"You have to look at what the total cost of that [employee] will be," Granger says. “For example, if an employee's salary is $60,000, employer taxes may be another 12 to 15 percent on top of that. … You have to think about how much you're paying out. And if you're going to offer benefits, factor those in as well. How much is that going to cost per employee per month?"

Owners also need to look at onboarding costs.

"There is a lot of turnover in cannabis, and it costs a lot," she says. "I think the average report I saw was [around] $4,000 to bring on a new person. Like the onboarding, training, and opportunity cost because they're not fully up to speed, you might miss some sales."

RELATED: Employee Turnover Is the Norm in the Cannabis Retail Industry

Granger also suggests owners keep their annual payroll between 15% and 30% of their revenue.

"If the payroll number is above that threshold, then [they] need to think about whether [they] need to be in there doing more work, if a family member needs to be in there doing more work, or if [they] need to reduce your open hours," she says.

UNDERSTAND THE MARKET

Granger suggests operators maintain a good understanding of the market they reside.

Retailers: Retailers should understand where their market is as far as maturity. "As more cultivators come on board, they have more choices, and they can be a little bit more competitive with the vendors they choose," she says.

Granger also suggests retailers leverage data sources like Headset or BDSA to understand market trends and make better purchasing decisions.

"For mature markets, retailers need to understand who their customer is," she says. "So, when they're buying their product, they want to make sure that they're buying what their customers want [and that] they're fulfilling their customer's wants and needs."

Cultivators: Cultivators also need to understand where their market is regarding maturity. For example, as businesses come onboard in New York, they will be able to demand a higher price, she says. "The reason why that is an issue is because there is no interstate commerce in cannabis yet. So, you can't just go to Oregon and buy cheap product and sell it in New York. The entire supply chain has to be maintained within that state."

As the market matures, prices tend to go down. For example, "Nevada is a tourist town, so we were able to demand a much higher price per pound, but now the novelty is dying down, and more states are opening up, so people don't have to travel to Nevada. … That's going to impact the prices these cultivators can get as well," she adds.

Cultivators should also consider the costs associated with growing in specific states, as cultivating in a place like Oregon may be cheaper than Nevada, she says.

UTILITY

She says that operators must also evaluate utility costs when budgeting for 2023, including lighting, electricity, water, etc.

"Especially for cultivators. Electricity and utility bills are the biggest things because these cultivation facilities require a lot," Granger says. "It's just higher for cultivation because the plants require certain types of lighting and a certain climate which you have to control with air conditions and humidifiers and things like that."

BUILD-OUT COSTS

New and existing businesses should also consider expansion plans and build-out costs, she says.

"Depending on your grow, if you're a startup, you've got to factor in all the store build-out costs to get it up and running," Granger says. "So, in order to create a budget for a new facility, you need to start going out there and getting quotes from architects, from construction companies, understanding what the utility is going to be, and understanding professional service providers. Getting all these different types of quotes so that you can have a clear understanding of what it's really going to take."

TAXES

When creating a budget, Granger says operators should also consider state-specific cannabis tax requirements.

Aside from federal and state income tax, "there's also marijuana retail tax and marijuana cultivation taxes, which are reports that you file on a monthly or quarterly basis and pay to the state on your sales, on top of just your income tax reports,” Granger says. “So, they've got to make sure that they understand what their marijuana taxes requirements are for that state, as well as their license and registration requirements. … So, depending on their state and their vertical, they need to be budgeting their license renewal fees, their excise tax, sales tax and income tax.”

SECURITY

Security is also a significant cost. For example, some states may require businesses to have security guards on-site or a specific number of cameras.

"There are certain cities in California that require businesses to have two security officers. And some of the jurisdictions require that the security officer hired by the cannabis operator patrols the neighborhood around the dispensary,” Granger says.

Technology is another essential cost to consider.

"Understanding the regulations and knowing how much you need to spend on security, cameras, and all those different things," Granger says. "Technology is a big piece of getting that up and running. POS systems, cameras, [key fobs,] and all that type of stuff."

INFLATION

Operators should also examine potential inflation-related costs when creating a budget.

For example, businesses looking to expand should factor in product and building material costs, delays that might occur due to inflation, and more.

"Price compression is also a huge thing that's happening. Because of the inflation, people are trying to demand lower prices down the line from the vendors so that they can turn a profit," she says. "So, with the price compression, they need to budget in, 'I might not get as much as I thought I was getting,' and they … need to scale down."

Granger also suggests businesses monitor their budgets and conduct a budget-vs.-actuals analysis monthly or weekly. 

"If they're looking at their average weekly transactions and their average cost per transaction and they're seeing that the volume is dropping, like if they expected 200 transactions a week and they're only getting 180, ... they need to start actively making adjustments for that decrease in revenue.”

Editor's Note: Granger spoke at the 2022 Cannabis Conference on the session "Is Your Budget Leading Your Business to Profitability?" Granger is the only CPA to have been featured in The Wall Street Journal for her unique approach to helping accounting professionals expand their practice to support the legal cannabis industry. She’s provided her support, consulting, and business development skills to over 600 accounting professionals across the United States. Granger entered the cannabis industry in 2017 and went from start-up to exceeding $3 million in revenue in just over two years. She’ll guide you to your own solid revenue gains in the highly regulated cannabis industry with a strong foothold in the market.